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Gold and Systemic Crisis
Gold and Systemic Crisis
"To all; are you ready? Never in the history of financial markets have there been so many landmines in place, each one wired directly to a nuclear bomb that sits atop the ENTIRE global financial system. The 'masters of the financial universe' have postponed the coming day of reckoning for so long and in so many different ways that they have backed themselves into a corner where almost any movement at all will trip one of these numerous landmines."
-FOFOA
Bread is not for sale in Zimbabwe dollars.
Presently many otherwise intelligent and capable individuals in America do not seem to understand the origins of the present financial crisis -- and the multiple aspects (or shall we say 'tentacles'?) of its origination. These tentacles stretch far back in history: from the present demoralization and fragmentation of American society, to the demonetization of gold in 1971, stretching to the forces behind World War I and World War II, and ultimately, in terms of the 20th century, to the creation the Federal Reserve in 1913.
Our topic here is gold , and unfortunately we will have to save the analysis of totalitarianism's final forms for another paper. But what must be understood is that ultimately we are witnessing a 'failure of imagination' on the part of the general public -- a similar failure to what always permits radical evil to spread. This moral failure was characterized by both Hannah Arendt in Eichmann in Jerusalem , and Alexander Solzhenitsyn in The Gulag Archipelago. Because in our society people do not understand history nor human nature, and are saturated with lies and propaganda 24/7 via the CNBS broadcast media, they cannot imagine the moral consequences of their actions or inactions -- let alone the consequences of systemic failure. So to remedy this situation, let us take a quick glance at history, but try to avoid the pitfalls of the gold bug crowd. As someone mentioned, here at ZeroHedge, we are 'truth bugs'.
"If only it were all so simple! If only there were evil people somewhere insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart?"
-Aleksandr Solzhenitsyn
History is a great teacher. One thing it shows us is that all systems of paper money fail. And they usually fail very quickly, not outlasting a man's lifetime. Gold and silver have been used as money for over 6000 years, including for extended periods of time, such as during the 1000 years of the Eastern Roman Empire. There are mathematical reasons why humans historically use precious metals as money, but we will not go into them here. Our present system is curious and almost astonishing that it has managed to last so long, given the lessons of history. Dr. Antal Fekete wrote in his latest paper that the mean time to failure of a non-gold backed system is approximately 18 years. Our present system has lasted over twice as long -- 38 years at last count, measured since the U.S.'s surreptitious default on it's foreign gold obligations under the Nixon administration in 1971 and currencies began to 'float'.
Most money has no tangible existence.
We have a fractional-reserve credit (read: debt) based system, where our money is mostly hallucinated computer pixels. The system is highly leveraged, but is almost entirely electronic. We now have multiple generations which have grown up without using money in its historic forms. For example, even the new Monopoly game uses electronic cards rather than paper money. Let me summarize these changes -- for simplicity sake, here we use gold to mean gold and/or silver. The global monetary system has changed three times: first, from gold to gold IOUs, then from gold IOUs to debt IOUs, and finally from debt IOUs to electronic-debt IOUs. But are these IOU's really 'unbacked', as claimed by the gold bugs? Actually , they *are* backed. They are backed as long as the IOUs can be exchanged for oil and gold at some realistic price metric.
According to Dr. Fekete, the reason our unmoored system has continued so long, past the usual 18 year lifespan of fiat currency experiments, is that we have invented a system of gold futures clearing and gold derivatives trading -- an innovation that did not exist in the past. In other words, we have created a gold 'price horizon' in electronic-debt IOUs, with the tendency to converge to the gold spot price. (Is the tail wagging the dog?) Additionally we have gold leasing, forward hedging, and all sorts of other trickery that has been going on for quite some time now. The electronic debt-IOU remains linked to gold via various Ponzi-like paper innovations.
The author FOFOA adds that additionally, what has characterized our system since 1971 is gold/oil flows between the various Petro States of the Middle East and the New York and London banking centers. These implicit deals allowed the United States to continue to purchase oil directly in dollars -- despite having defaulted on its international obligations. This 'innovation' somewhat resembles a US military-led protection racket. Remember that the second oil crisis of 1979-1980 coincided with price explosions in both gold and oil, yet catastrophe was avoided. This will not be the case the second time around.
There are also of course the lesser but nonetheless important details such as hedging which was done via large gold producers, the gold price suppression by the central banks, the geometric growth of OTC interest rate swaps, and so on. For those interested in these technical details, we highly recommend reading all the posts at FOFOA and the work of Rob Kirby. But here, the goal is a summary 'big picture' overview regarding the main points. What we can surmise though, is that our present system is a historical anomaly despite its technological innovations. And that should make us cautious of issuing blanket proclamations about the U.S. dollar's future stability over the next 8 weeks -- let alone the next 80 years. Have the pure dollar deflationistas skipped the Taleb? Sometimes we wonder.
The U.S. has a unique and deep relationship with Saudi Arabia, historically the world's largest oil producer. This relationship that goes back almost a century, to the foundation of Saudi Aramco by Rockefeller oil interests (specifically Standard Oil of California) in 1933. From 1933 to 1971 the payment system was somewhat stable, characterized by gold clearing on the international level at a fixed price of dollars for gold. This continued until the French under de Gaulle began draining the US Treasury of its gold, due to the expense of America's involvment in the Vietnam war. The French gold redemptions ultimately lead to the unilateral default of the United States on its gold obligations and the death of Bretton Woods I , which had been created post World War II with the dollar as gold-backed world reserve currency.
What has characterized our international system since 1971, or "Bretton Woods II" as it is sometimes called, is this: 1) the gold futures clearing system, and related paper markets and 2) the ability to swap oil for gold via these markets using exclusively US Dollars. This has given implicit support to the U.S. dollar far beyond what could be reasonably imagined considering the U.S. fiscal situation -- in the sense that the dollar is supported as long as 1) oil is for sale in dollars and 2) gold is for sale in dollars. This does not always have to be the case, and this is the core of the issue. If gold goes into permanent backwardation it will no longer be for sale in dollars on COMEX. Period. This will implicitly cut off oil flows to a trickle until payment is re-linked to gold via the IMF SDR or another mechanism.
The Western Roman Empire collapsed because it debased its currency.
To many of us, it is obvious the US equity markets will soon crash, but the real crisis will come with the failure of our currency -- a currency which is IMPLICITLY and historically linked with trading of both dollars for oil, and dollars for gold. Thus, these spot markets are the ones to watch. Some may be aware Russia recently surpassed Saudi Arabia as the world's number 1 oil producer -- and last week , number 2 oil producer Saudi Arabia has signed a $2bn weapons deal with Moscow. The final strategic alignment of Saudia Arabia and the rest of the Middle East remains up for debate, but we have certainly witnessed the tentative steps of the BRIC nations and their affiliated satellites to build their own international clearing system, based in Hong Kong and Moscow, rather than New York and London. Ultimately this will probably involve some form of the IMF SDR -- rebalanced with new currencies and possibly a gold component. Remember Medvedev at the G8?
Medvedev pimps the New World Currency at G8. No , it's not petrorouble
Minus the political shifts towards a 'multipolar' world (prior to the onset of the final bloody form of the Hegelian dielectic), the weakest point in the present system is certainly the U.S. Dollar. Indeed there are many angles for speculative currency attack. And there are many weak points at which this may simply happen by accident. Assuming we see such an external speculative attack, what can we expect?
1) A currency failure will happen rapidly (likely overnight to 8-12weeks). The dollar will devalue against gold and oil. We are talking 50% decline or more.
2) Gold will go into backwardation (aka Spot Price above Near-Futures Price). This is the single most important indicator.
3) The Gold price will vault upwards -- and ultimately trading will halt in USD.
4) Oil will likely vault upwards as well, but this analysis is difficult. The gold:oil ratio is a useful indicator.
Where will capital flow during a time of a systemic crisis? Since 1971, capital has moved up this chart. Now it is reversing. Capital will flow into government bonds , treasury bills, physical cash, and ultimately its final home , gold.
There are all sorts of other things that may occur under conditions of currency failure, but you can find these sorts of analysis elsewhere. Use your imagination, as Hannah Arendt might suggest. Or google teotwawki and crack open a beer. The point here is that our present system is very fragile and cannot last much longer in its present form. It is far too unstable. There will be a collapse , and out of this a new system will emerge. The only guarantee of your purchasing power is in physical gold coins which you have in your possession. This is why the Zerohedge Dog, Scooby, keeps 20% or more of his assets in physical gold coins, and at least another 10-20% in physical cash with which to pay his bills.
The world is changing ,and to cope with the new reality requires both discernment and imagination.
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"2) Gold will go into backwardation (aka Spot Price above Near-Futures Price). This is the single most important indicator.
3) The Gold price will vault upwards -- and ultimately trading will halt in USD."
Gold will become priceless and so valuable. And yet no one believes this.
I humbly submit we think about Gold proces in a different manner. The price of Gold won't go up, it will simply take more and more worth less dollars to purchase the same unit of Gold.
i was beginning to feel quite lonely in my strong views concerning gold's centrality in sustaining civilization and the economic order....this article demonstrates that such is not the case....my only quibble would be the slighting comment about gold bugs since this article is indeed a gold bug article....
however, the more important point is that someone has finally pulled together some cogent reasons for why gold alone is money (silver too) at all times in all places and why its reemergence is essential to reversing the calamities confronting us....
i owe fekete so much for explaining the intermediary utility of the gold derivatives market as the cause for deferral of collapse as it had long eluded my detection....
i really could not improve much on the article....good stuff maynard....
"ultimately we are witnessing a 'failure of imagination' on the part of the general public"
Zimbabwe is using US dollar as a currency after people started looking for gold and the inflation is down.
What makes you think Fed will let Gold compete with dollar as a major currency?
Good question... I think it is outside of their control, minus perhaps pulling the trigger.
For example, the Fed cannot force producers in China to accept dollars for their goods. They cannot force farmers in Ukraine to accept dollars for their goods. etc etc. If people with tangible goods think there is risk they might not be able to resupply if they accept dollars, they will simply sit on inventory as they will assume this is a better store of value. This becomes a positive feedback loop, and it is only one of many potential positive feedback loops. To prevent global commerce from grinding to a halt, gold will need to be reintroduced somehow to stabilize international currency markets should there be any sort of black swan event with the dollar.
my 2c anyway
that is where the next power struggle is....
the oligarchs removed gold in 1933 and 1971
in order to control the money....as amschel (?)
rothschild said - i care not who makes the
laws so long as i control the money....
there has been and will continue to be war
against gold....but when we get to the point of
its outlawing again
we are talking more theological matters than
economics or monetary science...
Equities will only out perform inflation during the early stages. Side note: wages usually do not keep up with inflation either, especially in the U.S. where inflation estimates are under reported.
A piece information on GLD.
http://www.bloggingstocks.com/2009/09/04/gold-nears-1k-per-ounce-will-go...
P.S. I own NGD, hence the request for opinion.
Physical gold/silver best by far, of course, but your thoughts on miners. Generally, they being stocks of the companies themselves, go down with a crashing market ( not as bad, but a low tide sinks all boats ).
However, in such a seminal event as you describe, could they possibly rocket, as the rush to gold has few doors?
i think of miners as lotto tickets i wouldnt' put more than maybe 10% of my money in them... thats just me though... you still have systemic and counterparty risk with mining equities while neither of these risks exist with bullion
What chance that they confiscate all physical gold? They've done it before. Furthermore, do you think exchange controls are likely?
But oh what fine lotto tickets they are! Miners with proven reserves are sitting on more gold than anyone, just that it's in the ground rather than a vault. That's the way I see it, buying into a decent company is taking a % of the in-ground stash. Not as safe as holding processed bullion, but way more upside potential. Just pick wisely and have a decent downside plan.
On that front I'm pissed off at goddamn Murphy, that son-of-a-bitch. Calls I sold (before China launched golden-tulip-mania) are moving into the money.
Who really owns the gold in the ground. As lo9ng as the miner is oerating profitably (or the govt. doesn't take it over), the miner is good. What happens when the miners get in trouble?
A gold coin in the hand is worth two in the ground.
I hear you. I don't put all eggs in one basket. Own physical PM for the security of it to a point, then speculate on higher risk, higher reward plays.
Another way to veiw hedging -
It is called "Busting Out The Joint." It works like this: The individual (or business) gets his tit caught in a wringer and needs to get protection or cash to keep afloat. He usually has to go to criminal types (loan sharks) for "help." When he signs this pact with the devil it is only a matter of time before the inevitable occurs. If the business can't meet its payments it goes out of business. Usually the product and assets are stripped over a period of time by these newly acquired bankers (loan sharks). Then the business is destroyed. In the end the business is torched. In Mafia parlance it is called "Busting Out The Joint."
The hedged miners find themselves in a similar situation. Ashanti (ASL) and Cambior (CBJ) have already been "Busted Out" and for Barrick (ABX) and AngloGold (AU) it is only a matter of time. They have made a pact with the devil by getting in bed with the Mafia (Bullion Bankers). When POG really takes off these poor companies will be "Busted Out" leaving their shareholders poorer for the experience.
- Black Blade 4/18/01
Barrick's hedge book is a nightmare.
Thanks, and agree. Gives me something to do next week- going to 100% bullion.
I understand the Exter pyramid, but don't stocks usually outperform cash during hyperinflation?
Even in a "only" 90 % devaluation, with 50% of S and P revenues coming from outside the US the S and P should rise no?
The market in Zimbabwe got ridiculous, so yes, you could probably expect an inverse relationship between nominal index value and purchasing power value. In a hyperinflation, that amounts to treading water, with the wipeout coming when the plug is inevitably pulled. When you see the cash in your hand devaluing, you will want to leave your growing pile of crap to ride until the bitter end.
if you ask me, we are looking at deflation + currency crisis, so i think exter's pyramid is a good summary.
also we might see multiple 'waves' for example, equities crash, everyone runs to tbills and cash, then everyone realizes that its not safe there intermediate-term and starts crowding into gold.
yes i think stocks outperform cash during hyperinflation but i don't think this will apply if there is political risk in owning stocks (higher tax rates, companies nationalized, 401ks or pensions nationalized, crony capitalism, etc etc).
What about currency / bonds of major producers of precious metals and oil such as Canada, Australia, etc...? Will they be able to maintain their value?
Even simpler - we are looking at hyperdeflation in terms of real money - Gold. So you can say that I am a "Gold (hyper)deflationist" whereas the Prechterites are "Dollar deflationists" or more precisely, "Paper-dollar deflationists".
Agreed... Gold crashes with the rest of the market... Then skyrockets later when the currency crisis hits. IMO
Agreed but I think people wrongly assume that the panic will lead to the USD catching a bid. I think this is wrong because people know the long term prospectus on the dollar so the alternative will be precious metals in my opinion not the USD. Think about it...if EVERYONE knows that the currency is headed for a crisis why would anyone want to own assets in that currency? Would you have bought a Zimbabwee bond at 50% interest? The confidence issue can not be understated in my opinion. I believe this is being over estimated by way to many.
i agree 100% . i think we are look at two basic scenarios: equity crash, then currency crisis later, or equity crash and currency crisis together.
PM there has been some projections of when the equity crash will happen. I think someone on KD's ticker forum did some charts on Treasuries and projected as early as 80 days out.
any comments?
Gee and when will us ZH do a betting pool on picking a crash date?
Cindy I think definitely within 80-90 days.
Black Friday - The day after thankgiving. When retail sales numbers are watched live by investors of all kinds and they see the consumer is dead it will mark the beginning of world wide recognition that the recovery is a hoax and we are still headed for the ground floor.
Thats my call.
.......... and, it's an excellent call. I'm thinking the same thoughts. It's going to be an ugly winter.
Agreed, I can't believe it has gone this far. But then I tend to downplay the emotional aspect of the market to my detriment.
It has to happen pretty soon.
equity crash, then currency crisis later ...
that is the higher probability given history.
Just wanted to say I enjoy your posts.
I think you will see an Asian currency come online if the IMF fails to come up with one. Much like the EUR. If I were Asia I would do that instead of going to the IMF where you have to beg for permission and play politics.
I think the Climate Change bill is an attempt by America to control Asia's growth and power....100%. If I were the Chinese I would tell the US to go pound sand about Climate Change bill but I think the Chinese are making a HUGE mistake by going along with it. If the Chinese agree they are dumber than I thought but then again nothing amazes me anymore they hold mostly US based assets right.
If America baulks about the climate bill then they should do what America did to the ENGLISH and French ....and threaten to sell their debt. The climate bill is a Trojan horse. I am a FIRM believer in managing and controlling our environment but there is nothing in this bill that does either...I read everything on the CCX and this is another attempt to literally print money or make money from thin air for the sake of "saving the environment." Absolutely criminal.
Either way the crisis (as you put it in several ways) is coming...the only debate at this point is what do you do, how will it look and what will it be like afterward. Gold, other currencies? Who knows?
That's what India said. Hilary Clinton went blah blah carbon credits blah blah global warming. India went blah blah go home.
Agree about the climate control bill, but the Chinese will smile, say they will go along, then do nothing.
Independent Contractor
Some empirical data from traveling: a dozen cab rides in the LAX, Long Beach and Van Nuys areas over the summer months. One driver spoke of how his brother-in-law couldn't pay the mortgage. 10 months later, the guy is still in his house - the bank hasn't foreclosed. Six of his relatives / friends learned of this and have stopped making house payments.
When asked of any knowledge of this "money saving / survival technique", four other cab drivers knew of relatives / friends employing the same tatic.
Worker ants out there are becoming educated in such areas - run up the unsecured credit card, live in a house free of charge. If and when they get kicked out, just go rent another four walls and have three squares a day.
Again, this is simple empirical data from the trenches, but gives a good idea how word spreads quickly for folks simply looking to survive day to day.
Yep, and this is exactly why I screen the crap out of any one before I rent to them. I'll be frakked if I'm going to let some scum sucker bend me over without consent. ;)
Sweet!
Meh, as long as we're passing out anecdotal evidence: My neighbors, for some crackheaded reason, thought the bank should reduce their principal, since they, with their $400K home ATM plays, were now underwater.
Bank supposedly said, you're paying your mortgage, so we can't work with you there.
So they stopped paying their mortgage. Three months later, their home was sold on the courthouse steps.
The rest of us in the neighborhood really appreciate how these a-holes used their home as a $400K charge card, then bailed, reducing home values for everyone else.
"reducing home values for everyone else"
I think you meant to say, "advertising the current market value to everyone else"
right? ;-)
Three months seems pretty quick considering the current foreclosure backlog.
Excellent work PM, bloody excellent!
Here are my 2 cents (Gold backed):
"...but try to avoid the pitfalls of the gold bug crowd."
In my opinion, those who are labeled 'gold bugs' by people today are simply those who understand the importance of Gold in our financial and political system, and realize that this entire economic crisis is centered on Gold, and, in fact, can be traced to the gradual elimination of Gold - via both propaganda and force - from our monetary system. 'Gold bugs' in reality are nothing but 'truth bugs'. Labeling people who seek out the truth in this manner is nothing but an attempt to marginalize and mock them so the frauds and the robbery can continue unabated.
"Our present system is curious and almost astonishing that it has managed to last so long, given the lessons of history."
Which only means that the eventual blowup will be that much more spectacular. Never in our history have so many people been deluded for so long. Our entire global monetary system today is nothing but a complete fraud - a giant Ponzi scheme, if you will - and when the truth becomes evident to all - as it will eventually, I can assure of that - you better have some golden insurance.
"and currencies began to 'float'."
Yeah, that's how they put it, when in reality all of them started to sink together (against Gold).
oh i have nothing against gold bugs, i am making fun of them because i am one
the main problem with gold bugs is many dumped their life savings into gold stocks seeing cheap valuations and hoping for leverage on the gold price. for example there is this idea thaht gold stocks will run to the moon, but i simply do not think that will be the case.
i believe bullion and cash are the most important investment positions right now.
PM, total agree with you. Since the gold miners are managed by human, there is no difference form other common stocks.
I wouldn't go that far...
The kicker with the miners is that in extremis the government is fully capable of seizing the mines or enacting some terrific extraction tax -- witness the typical third world tyrant -- about which the stockholders become bag-holders.
The miners can be a great play -- but must be considered more as speculation than anything else. You buy them FOR the risk.
As to how risky they can be -- revisit the late 70's run away move in the minor miners.
I wouldn't go that far...
The kicker with the miners is that in extremis the government is fully capable of seizing the mines or enacting some terrific extraction tax -- witness the typical third world tyrant -- about which the stockholders become bag-holders.
The miners can be a great play -- but must be considered more as speculation than anything else. You buy them FOR the risk.
As to how risky they can be -- revisit the late 70's run away move in the minor miners.
G_G, well said
PM, you are good.
I like your ideas and thoughts. by chat greetigns..